The Fallacy of Superstorm Sandy's Economic Benefit

Rather than bringing economic gain, the storm simply leaves us poorer.

According to a recent study conducted by the Bloustein School of Planning and Public Policy at Rutgers University, Superstorm Sandy will unleash an economic boom. Although the storm pretty much obliterated the New Jersey shore, the Garden State can realize a net economic benefit because of the construction boom that will result from rebuilding roads, bridges, homes, businesses, and the famed boardwalk. In short, "creative destruction" is actually good.

Windy city On the surface, there's some merit to the argument. Even before the storm hit, there was a lift in sales of generators from Generac, Briggs & Stratton, and Kohler, while local utilities Public Service Enterprise Group and Consolidated Edison hired thousands of temporary workers in anticipation of widespread power outages.

Now that there's been a broad swath of destruction, construction trades will get a boost, with Hovnanian(NYSE:HOV), the state's largest builder, having an opportunity to build new houses even if it delays some closings in the short term; Weyerhauser(NYSE:WY) and other building materials providers; GAF, the largest roofing materials company, selling more shingles; crews laying more asphalt for road repair; and Benjamin Moore and Sherwin-Williams(NYSE:SHW) selling more paints and coatings.

Good times! Happy days are here again.

Break out all the windows Or not. Unfortunately, what the professors ignore are the opportunity costs that far outweigh whatever benefits will be gained by narrow segments of the economy. Money that will now go to pay for new homes, new bridges, and new roads is money that won't be spent on food, clothing, cars, health care, or the myriad other things that government entities and individual homeowners would choose to spend it on but for the devastation they need to recover from.

The professors might do better to go back and read the classics, starting perhaps with Frederic Bastiat's fallacy of the broken window.

In his classic 1850 treatise, the French economic theorist described a shopkeeper whose store window was broken by his careless son and that he was forced to hire a glazier to repair. What was seen on the surface was the business the glassmaker received from repairing the window and how that boosted business. What's not seen, however, as Bastiat pointed out, is the loss of business by the baker, tailor, and grocer, who otherwise would have received the shopkeeper's money that he's forced to spend on the repair instead.

But it's not a wash economically, either; we're not just taking money from one pocket and putting it in another. Rather, money is being spent just to maintain the status quo. Had there been no damage, the money spent would have been spent on new goods and services actually helping the economy to grow.

In Bastiat's example, the community was actually poorer by the cost of one shopkeeper's window. In the case of the Jersey shore, we'll be poorer by the tens of billions of dollars it will cost us to rebuild. It's not economic growth we'll be seeing, but just climbing back up to where we were beforehand. Maybe. A look at New Orleans post-Hurricane Katrina should be enough to show that economic goodness doesn't follow destruction. Sometimes you don't even get back to square one.

Robbing Peter to pay Paul Sadly, the professors aren't alone in their misguided judgment. Analysts at Capital Economics last year said Sandy would turn into a benefit for everyone in less than a week! A professor and economist at the University of Maryland estimated $15 billion to $20 billion in rebuilding costs would generate $27 billion to $36 billion in economic activity.

Yet renowned economist Henry Hazlitt debunked that myth more than 50 years ago in his readable and easily accessible book Economics in One Lesson. Hazlitt explains that resources used for unnecessary expenditures are unavailable for other uses that would do more good for society. Having to spend money to rebuild may make local contractors happy, but that's money directed away from things the nation as a whole may want and need much more.

Superstorm Sandy is transferring money from beachfront property owners to construction companies, engineering firms, and building suppliers. It's superficial to see that as a net benefit, since we're missing the hidden costs and opportunities of the growth that could have occurred otherwise -- along with the realization that in the end, "creative destruction" is still destruction.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

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